Bubble contagion effect between the main precious metals
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 15 March 2022
Issue publication date: 3 January 2023
Abstract
Purpose
This study examines the extent to which gold and silver bubbles are correlated and which metal’s bubble spills over to the other. In addition, the overlap in bubble-like episodes for the two metals is demonstrated and the influence of crises (global financial crises, European debt crisis and the COVID-19 pandemic) on the development of these episodes is compared.
Design/methodology/approach
This study proposes a two-step approach. In the first step, price bubbles are identified based on the backward sup augmented Dickey–Fuller of Phillips et al. (2015a, 2015b) and modified by Phillips and Shi (2018). In the second step, the correlation in the contagion effect of the bubbles between the two precious metal prices is measured using a nonparametric regression with a time-varying coefficient approach developed by Greenaway-McGrevy and Phillips (2016).
Findings
The findings suggest that the safe-haven property of gold and silver during financial market turbulence induces excessive price increases beyond their fundamental values. Furthermore, the results indicate that bubbles are contagious among precious metal markets and flow mainly from gold to silver; these findings are associated with the period after 2005, particularly during the global financial crisis. A contagious bubble effect is not found between gold and silver during the coronavirus disease 2020 pandemic.
Practical implications
The results suggest that financial market participants should consider portfolio weights in precious markets in light of the bubble correlation between gold and silver, especially during crises.
Originality/value
To the best of the authors’ knowledge, this is the first study that explores the correlation of bubble-like episodes between gold and silver.
Keywords
Acknowledgements
The authors thank the anonymous reviewers of this manuscript. The first author would like to acknowledge the financial support provided by United Arab Emirates University (grand number 31B135-UPAR −3– 2020).
Funding: This study was financed by United Arab Emirates University (grand number 31B135-UPAR −3– 2020).
Citation
Maghyereh, A. and Abdoh, H. (2023), "Bubble contagion effect between the main precious metals", Studies in Economics and Finance, Vol. 40 No. 1, pp. 43-63. https://doi.org/10.1108/SEF-08-2021-0345
Publisher
:Emerald Publishing Limited
Copyright © 2022, Emerald Publishing Limited